With stock markets worried about the weakening U.S. economy and corporations reluctant to spend their mountains of cash, science and technology stocks have been flat this year. Yet, mutual fund managers are peering through the gloom, arguing that valuations are attractive and that the news eventually will be more positive.

“When things are this bad,” says Ian Ainsworth, senior vice president, investments, with Toronto-based Mackenzie Financial Corp. and lead manager of Mackenzie Universal Technology Class Fund, “then valuations reflect that kind of pessimism.”

Intel Corp., for instance, is trading at less than 10 times earnings despite its strong balance sheet.

“Even Apple Inc. is not at a severe premium to the market,” adds Ainsworth, noting that the stock is trading at a price/earnings ratio of 12. “Given the kind of growth it’s experiencing, you would think it should have a higher P/E ratio.”

Some very impressive growth in certain areas of technology is driving the stock performance of names such as Apple, says Ainsworth: “And some emerging companies are taking advantage of developments such as cloud computing and social networking. They are driving new trends, which, in turn, are pushing productivity and consumer demand.”

Yet, corporate America is holding back, mainly because of the uncertainty. Says Ainsworth: “That’s the key issue: are we going to see a pickup in the economy that would justify companies converting temporary employment into full employment? Will they start to invest capital to take advantage of the productivity gains offered by some newer technologies?”

Looking ahead, Ainsworth expects that employment growth in the U.S. will pick up later this year. “And at some point,” he says, “China will take its foot off the brake and reaccelerate its economy once again. That has positive implications.”

Although growth may not be dramatic in developed markets, he adds, it won’t take much to create more confidence and see the market turn: “Valuations are fairly attractive, and we’ll see money flow into some of these stocks.”

A growth manager, Ainsworth works alongside Mark Grammer and Wendy Chua, both vice presidents with Mackenzie. From an asset-allocation viewpoint, 20% of the Mackenzie fund’s assets under management is in semiconductors, 19% is in telecommunications equipment, 19% is in health care, 11% is in software and smaller holdings are in miscellaneous areas and cash.

One favourite holding in a 39-name portfolio is Qualcomm Inc. This software firm earns royalties from patents that are licensed to smartphone manufacturers that make so-called “4G” devices. “It’s a high-margin business and fairly stable,” says Ainsworth. “You can’t operate a 4G network without some of Qualcomm’s products.”

A long-term holding, Qual-comm’s stock is trading at about US$51.25 ($48.90) a share. Ainsworth sees about 15% upside within 12 months.



The Macroeconomic Crises that
have preoccupied stock markets will eventually be solved, says David Eiswert, vice president with Baltimore-based T. Rowe Price & Associates Inc. and manager of TD Science & Technology Fund: “They’re kicking the can down the road. That’s not a bad thing. That’s how you dilute, spread out and ultimately solve the problems.”

And it’s a process that could continue for three to five years. The good news, however, is “that each cycle that we go through, we get a little closer to solving the problems,” says Eiswert. “As an investor, you have to be comfortable being uncomfortable. You are not going to get certainty from the macro anytime soon. That’s the way it is.”

From another perspective, Eiswert does not expect an outright disaster that will lead to the breakup of the European Union, for instance. “The assumption we are making today is that the world is flexible enough to deal with the problems,” says Eiswert. “Look at today vs three years ago — the U.S. banks are very well capitalized. Fact is, European banks missed an opportunity and did not capitalize enough. Ultimately, as we go down the road, they may have to. But I don’t think there is a crisis that will bring down the world.”

Still, Eiswert sees market volatility as a buying opportunity: “We’re in a fantastic time of innovation and change. As long as I don’t think these periods of crisis end in disaster, these are opportunities to reshuffle the portfolio. We can move more weight into our highest-conviction names. That’s what we did last summer.”@page_break@Eiswert believes the trends that are developing today will play themselves out in the next 12 to 24 months: “We’re not in a cyclical recovery anymore. Now, the wheat and chaff are being separated. Companies with the best management and products are differentiating themselves from those that are not innovative and have weak management teams.”

About 22% of the TD fund’s AUM is in computer hardware, 20% is in software providers, 18% is in semiconductors and 17% is in telecommunications equipment, with smaller weightings in areas such as IT services.

A favourite stock in the 100-name fund is TriQuint Semi-conductor Inc., which makes filters and power amplifiers for smart-phones for clients such as Apple and Samsung. “[TriQuint] will have a tough third quarter,” says Eiswert, a bottom-up, growth investor. “But the business will reaccelerate dramatically into 2012.”

TriQuint’s stock is trading at about US$7.20 ($6.90) a share, or about nine times earnings. Eiswert has a US$14 target within 12 months.

Another favourite is Tibco Soft-ware Inc., whose products facilitate communication between various IT and database programs. Says Eiswert: “We’re seeing increasing amounts of software that wants to talk to other software.”

The stock is trading at about US$24.80 ($23.70) a share. Eiswert believes the share price could be in the mid-US$30s in 12 to 24 months.



The Macroeconomic Outlook is clouded, admits Ray Mawhinney, senior vice president, U.S. and global equities, with Toronto-based RBC Global Asset Management Inc. and co-manager of RBC Global Technology Fund.

“But if you look beyond the next couple of months, there should be some improving trends. We have to have some optimism that they will get something right in Europe, for instance. It could be an initiative along the lines of [the Troubled Asset Relief Program] used in the U.S.,” says Mawhinney. “We know what the problems are; we just don’t know what the solutions will be. If your time horizon is more than six months, you will see something resolved over the next couple of years in Europe, hopefully. In the U.S., politicians are smart enough to know that financial markets came to a standstill in 2008-09, and they don’t want that to happen again.”

Corporate America’s reluctance to spend its cash hoard is a complex matter because much of the money is sitting outside the U.S. “That makes it very difficult to repatriate and return to shareholders,” says Cameron Scrivens, RBCGAM vice president and co-manager of the RBC fund, adding that there is a proposal to bring the money back with few tax consequences. “But I don’t see it as a negative. It’s a positive, based on the fact their cash flow is strong.”

There has been an uptick in mergers and acquisitions among larger players, such as Hewlett-Packard Inc. and Oracle Corp., which have been acquiring smaller companies, notes Mawhinney. “They are buying smaller firms to remain competitive and avoid missing out on a product cycle. But others are saying, ‘Let’s not rush into this and throw money at anything.’ It’s been a balancing act, because some companies have been buying back some stock.”

Growth investors, Mawhinney and Scrivens have invested about 27% of the RBC fund’s AUM in software, 19% in semiconductors and semiconductor equipment, 15% in computers and peripherals, and smaller amounts in areas such as electronic equipment and instruments.

One top long-term holding in the 90-name RBC fund is Apple, maker of the ubiquitous iPhone and iPad devices. “[Apple] is still a great place to be,” says Scrivens. “[It has] the best smartphone out there, and [it] continues to have increased penetration in the computer space. It is extremely innovative and executes very well. It’s trading at a premium — but it’s justified.”

Apple’s stock is trading at about US$378 ($360), and has potential upside of about 15%-20% within 12 to 18 months. IE